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Job-Costing Systems
Chapter 3
Slide 3.2
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
INTRODUCTION
• How much does it cost?
• Managers ask this question for many purposes, including formulating overall strategies, product and service-emphasis decisions and pricing decisions.
• This chapter presents basic concepts of job costing.
Slide 3.3
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVES
1 Describe the building block concept of costing systems
2 Distinguish between job costing and process costing
3 Outline a six-step approach to job costing 4 Distinguish actual costing from normal costing 5 Understand job costing in service and
manufacturing contexts
Slide 3.4
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVES (CONTINUED)
6 Describe key source documents used in job- costing systems
7 Understand how the steps in the production process are tracked in a job-costing system
8 Describe alternative methods of dealing with period-end under- or overallocated indirect costs.
Slide 3.5
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 1
Describe the building block concept of costing systems
Slide 3.6
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS
• The following five terms constitute the building blocks that will be used in this chapter:
1 A cost object is anything for which a separate measurement of costs is desired.
Slide 3.7
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS (CONTINUED)
2 Direct costs of a cost object are costs that are related to the particular cost object and can be traced to it in an economically feasible way.
3 Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way.
Slide 3.8
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS (CONTINUED)
• The relationship among these three concepts is as follows:
Direct Costs
Cost Tracing
Cost Object
Indirect
Costs
Cost Allocation
Cost Assignment
Slide 3.9
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
BUILDING BLOCK CONCEPTS OF COSTING SYSTEMS (CONTINUED)
4 Cost pool is a grouping of individual cost items.
5 Cost allocation base is a factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object.
Slide 3.10
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 2
Distinguish between job costing and process costing
Slide 3.11
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
JOB-COSTING AND PROCESS-COSTING SYSTEMS
• There are two basic systems used to assign costs to products or services:
1 Job costing
2 Process costing
Slide 3.12
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
JOB-COSTING AND PROCESS-COSTING SYSTEMS (CONTINUED)
• In a job-costing system, the cost object is an individual unit, batch or lot of a distinct product or service called a job.
• In process costing, the cost object is masses of identical or similar units or a product or service.
Slide 3.13
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
JOB-COSTING AND PROCESS-COSTING SYSTEMS (CONTINUED)
• Process costing allocates costs among all the products manufactured during that period.
Slide 3.14
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
JOB-COSTING AND PROCESS-COSTING SYSTEMS (CONTINUED)
Job-costing Process-costing system system Distinct units Masses of
identical of a product or similar units of a or service product or service
Slide 3.15
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 3
Outline a six-step approach to job costing
Slide 3.16
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING
• The following six-step approach is used to assign actual costs to individual jobs:
1 Identify the chosen cost object(s).
2 Identify the direct costs of the job.
3 Select the cost-allocation base(s).
4 Identify the indirect costs associated with each cost-allocation base.
Slide 3.17
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
5 Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job.
6 Compute the cost of the job by adding all direct and indirect costs assigned to it.
Slide 3.18
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• D.L. Sports manufactures various sporting goods.
• D.L. is planning to sell a batch of 25 special machines (Job No. 100) to Healthy Gym for £104,800.
• A key issue for D.L. Sports in determining this price is the cost of doing the job.
Slide 3.19
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• Step 1: The cost object is Job No. 100.
• Step 2: Identify the direct costs of Job No. 100.
• Direct material = £45,000
• Direct manufacturing labour = £14,000
Slide 3.20
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• Step 3: Select the cost-allocation base.
• D.L. chose machine hours as the only allocation base for linking all indirect manufacturing costs to jobs.
• Job No. 100 used 500 machine hours.
• 2,480 machine hours were used by all jobs.
Slide 3.21
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• Step 4: Identify the indirect costs.
• Actual manufacturing overhead costs were £65,100.
• Step 5: Compute the rate per unit.
• Actual indirect cost rate is £65,100 ÷ 2,480 = £26.25 per machine hour.
Slide 3.22
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• Step 6: Compute the indirect costs allocated to the job.
• £26.25 per machine hour × 500 hours = £13,125.
Slide 3.23
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• Step 7: Compute the cost of Job No. 100.
Direct materials £45,000
Direct labour 14,000
Factory overhead 13,125
Total £72,125
Slide 3.24
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL APPROACH TO JOB COSTING (CONTINUED)
• What is the gross margin of this job?
Revenues £104,800
Cost of goods sold 72,125
Gross margin £ 32,675
What is the gross margin percentage?
£32,675 ÷ £104,800 = 31.2%
Slide 3.25
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TWO MAJOR COST OBJECTS
1 Products
2 Responsibility centres
Slide 3.26
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 4
Distinguish actual costing from normal costing
Slide 3.27
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
ACTUAL COSTING SYSTEM
Actual costing system is a job-costing system that uses actual costs to determine the cost of individual jobs.
• Actual costing is a method of job costing that traces indirect costs to a cost object by using the actual direct-cost rate(s) times the actual quantity of the direct cost input(s).
Slide 3.28
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
NORMAL COSTING
Normal costing is a costing method that allocates indirect costs based on the budgeted indirect-cost rate(s) times the actual quantity of the cost allocation base(s).
Slide 3.29
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
NORMAL COSTING (CONTINUED)
• Assume that D.L. Sports budgets £60,000 for total manufacturing overhead costs and 2,400 machine hours.
• What is the budgeted indirect-cost rate?
• £60,000 ÷ 2,400 = £25 per hour
• How much indirect cost was allocated to Job No. 100?
Slide 3.30
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
NORMAL COSTING (CONTINUED)
• 500 machine hours × £25 = £12,500
• What is the cost of Job No. 100 under normal costing?
• Direct materials 45,000 Direct labour 14,000 Factory overhead 12,500 Total £71,500
Slide 3.31
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LONGER TIME PERIOD USED TO COMPUTE INDIRECT-COST RATES
• The numerator reason (indirect costs):
• The shorter the period, the greater the influence of seasonal patterns on the level of costs.
• The denominator reason (quantity of the allocation base):
• The need to spread monthly fixed indirect costs over fluctuating levels of output.
Slide 3.32
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 5
Understand job costing in service and manufacturing contexts
Slide 3.33
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
VARIATIONS OF NORMAL COSTING
• Service industries perform jobs that differ from each other.
• Job costing is very useful in these industries.
Slide 3.34
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
VARIATIONS OF NORMAL COSTING (CONTINUED)
• Carmen and Associates provide home health services.
• Their budget includes the following:
• Total direct labour costs: £400,000
• Total indirect costs: £96,000
• Total direct (professional) labour hours: 16,000
Slide 3.35
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
VARIATIONS OF NORMAL COSTING (CONTINUED)
• What is the budgeted direct labour cost rate?
• £400,000 ÷ 16,000 = £25
• What is the budgeted indirect cost rate?
• £96,000 ÷ 16,000 = £6
Slide 3.36
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
VARIATIONS OF NORMAL COSTING (CONTINUED)
• Suppose a patient uses 25 direct labour hours.
• Assuming no other direct costs, what is the cost to Carmen and Associates?
• Direct labour: 25 hours × £25 = £625
Indirect costs: 25 hours × £ 6 = 150 Total £775
Slide 3.37
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
MANAGEMENT CONTROL AND TECHNOLOGY
• In what ways can modern technology help managers in making decisions?
Slide 3.38
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
MANAGEMENT CONTROL AND TECHNOLOGY (CONTINUED)
• Modern technology provides managers with quick and accurate product-cost information that facilitates the management and control of jobs.
Slide 3.39
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 6
Describe key source documents used in job-costing systems
Slide 3.40
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
WHAT ARE SOURCE DOCUMENTS?
• Source documents are the original records that support journal entries in an accounting system.
Slide 3.41
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
WHAT IS A JOB COST RECORD?
• Job cost record is a document that records and accumulates all the costs assigned to a specific job.
• It is the basic record for product costing.
Slide 3.42
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
WHAT IS A MATERIALS REQUISITION RECORD?
• A material requisition record is the form used to charge job cost records and departments for the cost of direct materials used on specific jobs.
Slide 3.43
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
WHAT IS A LABOUR TIME RECORD?
• A labour time record is used to charge job cost records and departments for labour time used on specific jobs.
• It shows the time each employee spent on individual jobs.
Slide 3.44
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 7
Understand how the steps in the production process are tracked in a
job-costing system
Slide 3.45
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
GENERAL LEDGER AND SUBSIDIARY LEDGERS
• The Work-in-Progress Control account presents the totals of the separate job-cost records pertaining to all unfinished jobs.
• The job-cost record and Work-in-Progress Control account track job costs from the time jobs are started until they are completed.
Slide 3.46
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS
Purchase of materials Conversion into and other work-in-progress manufacturing stock inputs
Conversion into Sale of finished finished goods stock goods
Slide 3.47
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Purchase of £80,000 worth of materials (direct and indirect) on credit.
• Materials Accounts Payable Control Control 1. 80,000 1. 80,000
Slide 3.48
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Materials costing £70,000 were sent to the manufacturing plant floor.
• £45,000 were issued to Job No. 100 and £10,000 to Job No. 102.
• £15,000 of indirect materials were issued.
• What is the journal entry?
Slide 3.49
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Work-in-Progress Control: Job No. 100 45,000 Job No. 102 10,000 Factory Overhead Control 15,000 Materials Control 70,000
Slide 3.50
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED) Materials Work-in-Progress Control Control 1. 80,000 2. 70,000 2. 55,000
Manufacturing Overhead Control Job No. 100 2.
15,000 2. 45,000
Slide 3.51
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Total manufacturing payroll for the period was £22,000.
• Job No. 100 incurred direct labour costs of £14,000 and Job No. 102 incurred direct labour costs of £3,000.
• £5,000 of indirect labour was also incurred.
• What is the journal entry?
Slide 3.52
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Work-in-Progress Control: Job No. 100 14,000 Job No. 102 3,000
Manufacturing Overhead Control 5,000 Wages Payable 22,000
Slide 3.53
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED) Wages Payable Work-in-Progress Control Control 3. 22,000 2. 55,000
3. 17,000
Manufacturing Overhead Control Job 100 2. 15,000 2. 45,000 3. 5,000 3. 14,000
Slide 3.54
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Wages payable were paid.
• Wages Payable Control 22,000 Cash Control 22,000
• Wages Payable Cash Control Control 4. 22,000 3. 22,000 4. 22,000
Slide 3.55
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Assume that depreciation for the period is £26,000.
• Other manufacturing overhead incurred amounted to £19,100.
• What is the journal entry?
Slide 3.56
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Manufacturing Overhead Control 45,100 Accumulated Depreciation Control 26,000 Various Accounts 19,100
• What is the balance of the Manufacturing Overhead Control?
Slide 3.57
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Manufacturing Overhead Control 2. 15,000 3. 5,000 5. 45,100 Balance 65,100
Slide 3.58
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• £62,000 of overhead was allocated to the various jobs of which £12,500 went to Job No. 100.
• What is the journal entry?
• Work-in-Progress Control 62,000 Manufacturing Overhead Control 62,000
• What are the balances of the control accounts?
Slide 3.59
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Manufacturing Overhead Work-in-Progress Control Control 2. 15,000 6. 62,000 2. 55,000 3. 5,000 3. 17,000 5. 45,100 6. 62,000 Bal. 3,100 Bal. 134,000
Slide 3.60
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• The cost of Job 100 is:
Job No. 100 2. 45,000 3. 14,000 6. 12,500 Bal. 71,500
Slide 3.61
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Jobs costing £104,000 were completed and transferred to finished goods, including Job No. 100.
• What effect does this have on the control accounts?
Slide 3.62
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED) Work-in-Progress Finished Goods
Control Control 2. 55,000 7. 104,000 7. 104,000 3. 17,000
6. 62,000 Bal. 30,000
Slide 3.63
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• What is the journal entry to transfer Job No. 100?
• Finished Goods Control 71,500 Work-in-Progress Control 71,500
Slide 3.64
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Job No. 100 was sold for £104,800.
• What is the journal entry?
• Accounts Receivable Control 104,800 Revenues 104,800 Cost of Goods Sold 71,500 Finished Goods Control 71,500
Slide 3.65
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• What is the balance in the Finished Goods Control account?
• £104,000 – £71,500 = £32,500
• Assume that marketing and administrative salaries were £9,000 and £10,000.
• What is the journal entry?
Slide 3.66
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
TRANSACTIONS (CONTINUED)
• Marketing and Administrative Costs 19,000 Salaries Payable Control 19,000
Slide 3.67
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
LEARNING OBJECTIVE 8
Describe alternative methods of dealing with period-end under- or
overallocated indirect costs
Slide 3.68
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
BUDGETED INDIRECT COSTS
• Budgeted indirect-cost rates can be assigned to individual jobs on an ongoing and timely basis.
• However, budgeted rates are based on estimates made up to 12 months before actual costs are incurred.
• Adjustments may need to be made by year end.
Slide 3.69
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS
• Underallocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual amount incurred.
• Overallocated indirect costs occur when the allocated amount of indirect costs is greater than the actual amount incurred.
Slide 3.70
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS (CONTINUED)
• Under- or overallocated indirect costs = Indirect costs incurred – Indirect costs allocated
• Underapplied (or overapplied) indirect costs and underabsorbed (or overabsorbed) indirect costs are equivalent terms.
Slide 3.71
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS (CONTINUED)
• Assume the following annual data for D.L. Sports: Manufacturing Overhead Control Bal. 65,100 Manufacturing
Overhead Applied Bal. 62,000
Slide 3.72
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS (CONTINUED)
• How was the allocated overhead determined?
• 2,480 machine hours × £25 budgeted rate
= £62,000
• £65,100 – £62,000 = £3,100 (under-allocated)
Slide 3.73
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS (CONTINUED)
• Reasons for the underallocated amount:
– Numerator reason (indirect costs)
– Denominator reason (quantity of allocation base)
Slide 3.74
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS (CONTINUED)
• Actual manufacturing overhead costs of £65,100 are more than the budgeted amount of £60,000.
• Actual machine hours of 2,480 are more than the budgeted amount of 2,400 hours.
Slide 3.75
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
END-OF-PERIOD ADJUSTMENTS (CONTINUED)
• Approaches to disposing underallocated or overallocated overhead:
1 Adjusted allocation rate approach
2 Proration approaches
3 Immediate write-off to Cost of Goods Sold approach
Slide 3.76
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
ADJUSTED ALLOCATION RATE APPROACH
• Adjusted allocation rate approach restates all entries in the general and subsidiary ledgers by using actual cost rates rather than budgeted cost rates.
• Actual indirect-cost rate is computed at the end of the year.
• Every job to which indirect costs were allocated during the year has its amount recomputed.
Slide 3.77
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
ADJUSTED ALLOCATION RATE APPROACH (CONTINUED)
• Actual manufacturing overhead (£65,100) exceeds manufacturing overhead allocated (£62,000) by 5%.
• 3,100 ÷ 62,000 = 5%
• Actual manufacturing overhead rate is £26.25 per machine hour (£65,100 ÷ 2,480) rather than the budgeted £25.00.
Slide 3.78
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
ADJUSTED ALLOCATION RATE APPROACH
• D.L. Sports could increase the manufacturing overhead allocated to each job by 5%.
• Manufacturing overhead allocated to Job No. 100 under normal costing is £12,500.
• £12,500 × 5% = £625
• £12,500 + £625 = £13,125 which equals actual manufacturing overhead.
Slide 3.79
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH
• Proration is the spreading of under- or over-allocated overhead among ending Work-in- Progress, Finished Goods and Cost of Goods Sold.
Slide 3.80
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH (CONTINUED)
• Basis to prorate underallocated or overallocated overhead:
1 Total amount of manufacturing overhead allocated (before proration)
2 Ending balances of Work-in-Progress, Finished Goods and Cost of Goods Sold
Slide 3.81
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH “A”
• Manufacturing overhead component of year-end balances (before proration):
• Work-in-Progress £23,500 38% Finished Goods 26,000 42% Cost of Goods Sold 12,500 20% Total £62,000 100%
Slide 3.82
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH “A” (CONTINUED)
• £3,100 × 38% = £1,178 to Work-in-Progress
• £3,100 × 42% = £1,302 to Finished Goods
• £3,100 × 20% = £620 to Cost of Goods Sold
Slide 3.83
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH “A” (CONTINUED)
Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 1,302 0 33,802
Cost of Goods Sold Work-in-Progress 71,500 30,000 620 1,178 72,120 31,178
Slide 3.84
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH “B”
• Ending balance of Work-in-Progress, Finished Goods and Cost of Goods Sold
• Work-in-Progress £30,000 22% Finished Goods 32,500 24% Cost of Goods Sold 71,500 54% Total £134,000 100%
Slide 3.85
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
PRORATION APPROACH “B” (CONTINUED)
Manufacturing Overhead Finished Goods 65,100 62,000 32,500 3,100 744 0 33,244 Cost of Goods Sold Work-in-Progress 71,500 30,000 1,674 682 73,174 30,682
Slide 3.86
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
IMMEDIATE WRITE-OFF TO COST OF GOODS SOLD APPROACH
Manufacturing Overhead 65,100 62,000 3,100 0
Cost of Goods Sold 71,500 3,100 74,600
Slide 3.87
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
CHOOSING AMONG APPROACHES
• The adjusted allocation rate approach provides the most accurate record of individual job costs.
• Indirect-cost-allocated components provide the most accurate stock and cost of goods sold figures.
• Immediate write-off approach is the simplest.
Slide 3.88
Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, © Pearson Education Limited 2012
End of Chapter 3